In the ongoing debate over banning single-family home zoning and turning more people into renters, one major detail has been disturbingly overlooked: homeownership builds wealth for communities of color and low-income households. It’s a key fact that grabbed the attention of top policymakers in the 1990s, and was confirmed by researchers at Harvard University’s Joint Center for Housing Studies.
“Homeownership continues to represent an important opportunity for individuals and families of limited means to accumulate wealth,” the researchers wrote. “As such, policies to support homeownership can be justified as a means of alleviating wealth disparities by extending this opportunity to those who are in a position to succeed as owners under the right conditions. The key, of course, is to identify the conditions where lower-income and minority households are most likely to succeed as owners and so realize this potential while avoiding the significant costs of failure.”
For the study “Is Homeownership Still an Effective Means of Building Wealthy for Low-Income and Minority Households? (Was it Ever?),” Harvard researchers Christopher Herbert, Daniel McCue, and Rocio Sanchez-Moyano examined data and academic literature to find out if homeownership continues to be a successful method for growing wealth — even after the financial crisis of 2008. They revealed several important findings.
First, homeownership can be risky, but it’s worth the risk — and does not leave people worse off if things go awry.
“Even after the tremendous decline in housing prices and the rising wave of foreclosures that began in 2007,” the researchers wrote, “homeownership continues to be a significant source of household wealth, and remains particularly important for lower-income and minority households. As has become painfully clear, owning a home is not without risk. But even during a time of excessive risk taking in the mortgage market and extreme volatility in house prices, large shares of owners successfully sustained homeownership and created substantial wealth in the process (at least through 2009). While African-American and lower-income households were somewhat less likely to sustain homeownership, these groups also experienced sizeable gains in net wealth on average that was associated with owning, while renters saw few gains. Owners who failed to sustain homeownership did suffer substantial loss in wealth, but much of the wealth was associated with the move into homeownership, so these households essentially fell back to their initial wealth levels. At least in terms of household wealth, failed attempts at owning do not appear to leave the typical household worse off than when they started.”
Second, in real-life practice, homeowners are more likely to accumulate wealth than renters.
“Our analysis highlights two primary mechanisms by which owning appears to generate wealth over a decade-long period. Most obviously, owners can accrue substantial wealth through appreciation in home prices, as evidenced by the outsized gains realized among those who first became owners in the 2003 and 2005 Panel Study of Income Dynamics (PSID) waves as home prices took off. But fluctuations in home prices are a two-edged sword and a significant share of these gains were subsequently lost when the bottom fell out of the market. The other mechanism by which owning is associated with increases in wealth is through the large increase in savings that occurs when households make the move to owning. This is evidenced among those first buying between 2007 and 2009 who, despite the troubled housing market, had gains in net worth of $18,000, more than tripling the amount they held before buying a home. Over a longer period of time the paydown of principal will further add to these gains, although the period studied was too short to capture these gains. But this forced savings aspect is arguably an important way that owning leads to wealth creation over the long run since it is at work in all market conditions. While studies simulating the financial returns to owning and renting find that renting is often more likely to be beneficial, in practice renters rarely accumulate any wealth. In no small part this seems traceable to the difficulties households face in trying to save absent either a clear goal or an automatic savings mechanism.”
Third, homeownership has meaningful social benefits.
“It is also important to bear in mind that the desire to own a home is not solely — or even primarily — motivated by financial goals. Homeownership’s appeal lies strongly in associations with having control over one’s living situation, the desire to put down roots in a community, and the sense of efficacy and success that is associated with owning.”
Fourth, politicians should help households succeed as homeowners.
“A key challenge for policymakers is to assess what degree of risk of failure is appropriate. From a wealth perspective, the opportunity to realize fairly substantial gains if owning is maintained against the risk of essentially falling back to starting wealth levels if it is not suggests that there is reason to err on the side of fostering attempts at owning.”
The researchers also note that policymakers should provide “supports for renters and owners alike to find affordable, good quality housing.”
In the end, politicians must seriously consider the negative impacts on communities of color before banning single-family home zoning.
Banning single-family home zoning invites predatory developers into middle- and working-class communities of color where purchasing properties may be less expensive. Those developers will then construct over-priced apartments, hoping to lure more affluent individuals into, for example, historically Black and Latino neighborhoods. Longtime, less affluent residents will then be forced out due to gentrification and displacement — they won’t be able to pay rising, sky-high rents.
In fact, the negative consequences of banning single-family home zoning will be felt most by lower-income communities of color, not predominantly affluent areas. Predatory developers will go where land is least expensive.
In addition, demolishing large swaths of single-family housing for apartments will negatively impact renters’ ability to someday become homeowners and build wealth since less single-family housing stock will be available.
If politicians push through wide-reaching bans on single-family home zoning, they will take away a key tool for communities of color to build wealth, fuel already troubling economic disparities, fuel gentrification, and trigger a massive transfer of wealth and political power to the corporate landlords and other large real estate entities who will own the new rental housing.